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Friday, January 13, 2012

Rent Seeking by David R. Henderson

Rent Seeking

by David R. Henderson

Rent seeking” is one of the most
important insights in the last fifty years of economics and,
unfortunately, one of the most inappropriately labeled. Gordon Tullock
originated the idea in 1967, and Anne Krueger introduced the label in
1974. The idea is simple but powerful. People are said to seek rents
when they try to obtain benefits for themselves through the political
arena. They typically do so by getting a subsidy for a good they produce
or for being in a particular class of people, by getting a tariff on a
good they produce, or by getting a special regulation that hampers their competitors. Elderly people, for example, often seek higher Social Security
payments; steel producers often seek restrictions on imports of steel;
and licensed electricians and doctors often lobby to keep regulations in
place that restrict competition from unlicensed electricians or doctors.

But why do economists use the term “rent”? Unfortunately, there is no good reason. David Ricardo
introduced the term “rent” in economics. It means the payment to a
factor of production in excess of what is required to keep that factor
in its present use. So, for example, if I am paid $150,000 in my current
job but I would stay in that job for any salary over $130,000, I am
making $20,000 in rent. What is wrong with rent seeking? Absolutely
nothing. I would be rent seeking if I asked for a raise. My employer
would then be free to decide if my services are worth it. Even though I
am seeking rents by asking for a raise, this is not what economists mean
by “rent seeking.” They use the term to describe people’s lobbying of
government to give them special privileges. A much better term is
“privilege seeking.”
It has been known for centuries that
people lobby the government for privileges. Tullock’s insight was that
expenditures on lobbying for privileges are costly and that these
expenditures, therefore, dissipate some of the gains to the
beneficiaries and cause inefficiency. If, for example, a steel firm
spends one million dollars lobbying and advertising
for restrictions on steel imports, whatever money it gains by
succeeding, presumably more than one million, is not a net gain. From
this gain must be subtracted the
one-million-dollar cost of seeking the restrictions. Although such an
expenditure is rational from the narrow viewpoint of the firm that
spends it, it represents a use of real resources to get a transfer from
others and is therefore a pure loss to the economy as a whole.
Krueger (1974) independently
discovered the idea in her study of poor economies whose governments
heavily regulated their people’s economic lives. She pointed out that
the regulation was so extensive that the government had the power to
create “rents” equal to a large percentage of national income. For India
in 1964, for example, Krueger estimated that government regulation
created rents equal to 7.3 percent of national income; for Turkey in
1968, she estimated that rents from import licenses alone were about 15
percent of Turkey’s gross national product. Krueger did not attempt to
estimate what percentage of these rents were dissipated in the attempt
to get them. Tullock (1993) tentatively maintained that expenditures on
rent-seeking in democracies are not very large.

About the Author

David R. Henderson is the editor
of this encyclopedia. He is a research fellow with Stanford University’s
Hoover Institution and an associate professor of economics at the Naval
Postgraduate School in Monterey, California. He was formerly a senior
economist with President Ronald Reagan’s Council of Economic Advisers.